The Predictive Value of Government Accounting Information and the Secondary Brazilian Bond Market

Abstract

The international literature highlights evidence on the predictive ability of government accounting information in relation to bond markets, especially for sub-national governments’ bonds. However, there is little evidence in the literature about the role of accounting information from national governments. Having observed this gap, we aimed to identify how strongly the government accounting information affects the pricing of the government bonds issued by the Brazilian Federal Government and traded in the secondary market. In this research, we analyzed the transactions carried out without the direct participation of the federal government. The predictive ability of the accounting information of the Brazilian federal government was verified for the period from 2003 to 2012 on a monthly basis. Following the value relevance approach, we developed price and return models for the bond National Treasury Bills, Single Series. After analyzing the presence of unit roots in the price and return series, we estimated regressions using the ordinary least squares method. We showed that the accounting information of the Brazilian federal government has predictive ability regarding the pricing of bonds traded in the secondary market. However, this does not mean that the government accounting information is fully and directly used by investors, but rather that such information is intended as a proxy for information reviewed by investors when negotiating such bonds, these investors being considered as limited rational agents.